Interest rates are a big part of how loans and credit work, influencing everything from the affordability of mortgages to personal loans. They shape the financial landscape and should always be a consideration when creating budgets and making financial decisions.
The interest rate is the amount charged by the entity lending you money to compensate you for using their assets. It’s usually noted as a percentage and can be calculated as the principal sum multiplied by the annual rate divided by the duration of the loan or deposit (for example, a loan of $100 with an annual rate of 15% results in an APR of 391%).
When it comes to borrowing, your interest rate depends on both your financial standing and the risk the lender takes when lending you money. Those with good credit scores and long-term financial goals are more likely to receive lower rates because they are viewed as less of a liability for the lender. The type of debt also influences your interest rate; mortgages that are secured by property typically have lower rates than unsecured personal loans and credit cards.
The same is true for savings and investments; the state of the economy can influence both short-term political gains and the profitability of your investment. With this in mind, understanding both the difference between fixed and variable interest rates can help you make savvy financial decisions that align with your needs and goals.
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